July 7, 2021

By: Alexander Gorelik Associate, Smith, Currie & Hancock LLP

A pair of recent decisions from the United States Armed Services Board of Contract Appeals (ASBCA), addressing the appeals of Odyssey International, Inc. to actions taken by the U.S. Army Corps of Engineers, underscore just how damaging failure to obtain payment and performance bonds can be for a contractor on a federal construction job. The first of these two decisions came out on June 2, 2020. It affirmed the Army’s termination of a contractor for default for its inability to provide the bonding required on a contract that it received from the Army. The ASBCA then issued the second decision on May 11, 2021, agreeing that the Army is entitled to excess re-procurement costs because of the default, in the pre-interest amount of $1,991,320 (the difference between the original, $19,832,000 contract with Odyssey and the $21,823,320 re-procurement contract).

These decisions are not particularly surprising in that they follow precedent previously set by the ABSCA, which held that “a contractor’s failure to provide performance and payment bonds is a breach of a condition that can support a default termination.” But the facts of Odyssey’s appeals suggest that astute contractors should not be too quick to dismiss these decisions either. 

The Facts.

The saga of Odyssey dates back to May of 2018 when the federal government first informed Odyssey that its “former Chief Financial Officer (CFO) was a prime target in a criminal investigation by the U.S. Attorney’s Office.” The federal government noted that the investigation was ongoing and involved “a potential HUB Zone violation by Odyssey and fraud by the former CFO.” While the investigation was pending, Odyssey proceeded with its federal work. On March 27, 2019, Odyssey entered into a new contract with the Army for the construction of an air traffic control tower at an Air Force Base in North Carolina.

As is typical on federal construction jobs, the contract required Odyssey to submit performance and payment bonds to the government within ten days of award. But when Odyssey tried to obtain the bonding for its new project, all of the sureties contacted to bond the work refused. As one prospective surety explained to Odyssey’s insurance agent:

the main reason we have to pass on [bonding Odyssey] is due to  the Hub Zone investigation in place. The law underlying the false claim (the false claim act) has no individual Hub Zone designation which would mean the company is subject to investigation. So even though the FBI has indicated it is not focusing on the company, there is still a potential that can occur and a surety who issues any bonds for the company who after the fact is found are not what the [sic] claim to be (Hub Zone compliant) are subject to triple damages.

We, as a company, have seen this in the past and will not consider any requests with anything pending regarding Hub Zone claims. We would not be willing to consider anything for the account until this issue is completely resolved.

 Accordingly, nearly a month after receiving the contract, Odyssey informed the Army’s contracting officer about its challenges in obtaining the necessary bonding. The Army responded by issuing a cure notice requiring Odyssey to produce the necessary bonds. When Odyssey failed to do so, the Army issued a notice terminating it for default.

In this case, at least, the prospective sureties’ concerns ultimately proved warranted. More than a year after the termination, a federal grand jury indicted Odyssey’s president and principal shareholder for wire fraud and other crimes related to the alleged HubZone violations. In addition, Odyssey’s former CFO and Chief Operating Officer (COO) both pled guilty to various criminal charges.   

A Few Thoughts.

The ASBCA’s decisions beg the question: when does it become improper for the government to entertain or award new contracts to contractors under criminal investigation? The unaddressed answer is particularly important because even the existence of an investigation alone will often restrain a contractor’s ability to perform. If the government takes the risk of a potential contractor’s inability to perform due to the government’s own investigation, should it still be entitled to excess re-procurement costs in all cases? Of course, a push for an alternative approach may lead the government to effectively debar contractors simply for being under government investigation.

In any case, the lessons of Odyssey make clear that contractors who know they are under government investigation act at their own risk when entering into new contracts with the federal government. If the investigation prevents such a contractor from being unable to perform its contract obligations, the government will likely not hesitate in terminating the contractor for default.    

The impact of these lessons may be particularly significant for contractors in the construction space. A surety’s hesitation to bond a principal who is under government investigation for fear of False Claims Act exposure may become a more prevalent risk based upon the recent trend of cases seeking to hold sureties liable for their contractors’ False Claims Act violations. For example, in Scollick v. Narula, currently pending before the United States District Court of the District of Columbia, the Court is examining whether the surety is liable to the government for submitting payment applications on a set-aside contractor where “red flags” existed about the legitimacy of the contractor’s eligibility as a service-disabled veteran owned small business.  If that court finds that that surety has a duty to the government to investigate and confirm the contractor’s set-aside status, that decision may well lead to more sureties tightening their underwriting standards even further, making it increasingly more difficult for contractors to obtain bonds.  If that occurs, there will most likely be a wave of terminations for default from the government in situations where the contractor is unable to obtain required Miller Act bonds. That risk should concern everyone involved.

Smith Currie provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.

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